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Monitoring Future Economic Growth in Canadian Provinces with New Leading Economic Indexes

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Author Info
Carl Gaudreault
Jenness Cawthray
Robert Lamy

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Abstract

This paper proposes new leading economic indexes for Canadian provinces, based on the NBER methodology, to monitor future short-term business cycle developments. The empirical evaluation of the performance of the NBER leading economic indexes in signaling cyclical turning points and forecasting growth in provincial economic activity showed that they have useful properties. First, for all provinces, the cyclical turning points in the leading economic index lead the cyclical turning points in the coincident economic index. On average, the lead is 2.8 quarters (at cyclical peaks) and 0.2 quarters at cyclical troughs. Second, for all provinces, except Newfoundland and Prince Edward Island, the leading economic index signaled all recessions in the last two decades. An important weakness, however, is the large number of false signals – three on average in the last twenty years. Third, for all provinces, out-of-sample simulations from first quarter 1992 trough to fourth quarter 2000 showed that a leading indicator model, with growth in the leading economic index lagged one-quarter as the exogenous variable, performs significantly better in forecasting growth in the coincident economic index than ARIMA models.

Ce papier présente de nouveaux indices économiques avancés pour les provinces canadiennes, construits avec la méthodologie du NBER, afin de suivre l’évolution future à court terme des cycles économiques provinciaux. L’évaluation empirique de la performance des indices économiques avancés en ce qui a trait au signalement des points de retournement cyclique et à la prévision de la croissance économique provinciale montre qu’ils ont des propriétés fiables. Premièrement, pour toutes les provinces, les points de retournement cyclique des indices économiques avancés devancent ceux des indices économiques coïncidents. En moyenne, l’avance est de 2,8 trimestres aux sommets cycliques et de 0,2 trimestres aux creux cycliques. Deuxièmement, pour toutes les provinces à l’exception de Terre-Neuve et de l’Île-du-Prince-Édouard, les indices économiques avancés ont annoncé toutes les récessions dans les deux dernières décennies. Toutefois, une faiblesse importante est le nombre élevé de faux signaux – trois en moyenne au cours des vingt dernières années. Troisièmement, pour toutes les provinces, les simulations hors échantillon du premier trimestre 1992 jusqu’au quatrième trimestre 2000 montrent qu’un modèle indicateur, avec la croissance de l’indice économique avancé retardé d’un trimestre comme variable explicative, fonctionne significativement mieux pour prévoir la croissance de l’indice économique coïncident qu’un modèle ARIMA.

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Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2002-02.

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